The problem with tariffs

25 July 2018

NormanL

The president has proposed imposing tariffs on all $500 billion worth of goods the U.S. imports from China. Tariffs are taxes on consumers -- and work as income transfers from those same consumers to specific companies whose products are given government protection from competition.

Staunch free marketer Dan Mitchell doesn't think much of tariffs. No, that's being too mild. He loathes them for the harm they do to American workers, consumers, taxpayers, businesses, and investors. In this piece for the Foundation for Economc Education, he lists the reasons why tariffs are bad no matter how you spin them:

Taxpayers—Tariffs are taxes. So when Trump imposes $13 billion of tariffs on Canada and $37 billion of tariffs on China, what’s really happening is that he’s increasing taxes by those amounts on American consumers. Trade taxes technically are paid by importers, but the real burden is borne by individuals, just as individuals bear the cost when a business writes a check for the corporate income tax.

Workers—The “seen” effect of protectionism is that a few jobs are saved in a certain sector. But because the economy-wide cost of saving those jobs is so high, the “unseen” effect of protectionism is that overall employment falls. To cite just one example, Trump’s proposed taxes on auto imports are projected to reduce net employment by 195,000-624,000 jobs.

Consumers—When tariffs are imposed, selected special interests are shielded from competition and they respond by raising prices. This is bad news for households. Consider the case of washing machines. In the opening salvo of his war on trade, Trump imposed higher taxes on imported machines earlier this year. This headline from Mark Perry at AEI shows the consequences.

Retailers—As trade taxes ripple through the economy, one obvious adverse effect is that stores have to raise prices, which leads to lower sales. But that microeconomic impact just part of the damage. The combination of trade taxes and higher prices also put a dent in household budgets, and this macroeconomic impact leads to less overall spending on other items.

Exporters—When Trump unilaterally imposes higher taxes on trade, other nations almost always respond with tit-for-tat protectionism. And when these other nations target American products, that necessarily reduces exports.

Manufacturers—One of the big buzz phrases in business is “global supply chains,” which is simply a way of saying that companies have developed intricate networks to ensure the best inputs at the best prices. Trump’s tariffs have disrupted these networks by raising the prices of certain inputs. But the damage isn’t just higher prices.

Investors—At the end of the interview, I said Trump’s latest protectionist measures were akin to going from 1 month pregnant to 3 months pregnant. Except we’re talking about Rosemary’s Baby, not a bundle of joy. At the risk of mixing my cinematic references, continued 1930s-style protectionism eventually could produce Chucky after 9 months.

Short version: tariffs are bad policy, and worse economics. We have long criticized governments, both state and federal, for picking winners and losers using the power of taxes, regulation, and, yes, tariffs. Is China a bad actor on trade? Yes they are -- particularly in their outright theft of intellectual property. They should be held strictly accountable for such behavior (and U.S. companies are not the only victims of such thievery). But imposing tariffs on China, Canada, Mexico, the Europeans? That's a recipe for failure.